{"id":1940,"date":"2024-08-29T05:16:25","date_gmt":"2024-08-29T05:16:25","guid":{"rendered":"https:\/\/actinvest.com.au\/?p=1940"},"modified":"2024-08-29T05:16:25","modified_gmt":"2024-08-29T05:16:25","slug":"capital-losses-can-help-reduce-nali","status":"publish","type":"post","link":"https:\/\/actinvest.com.au\/index.php\/capital-losses-can-help-reduce-nali\/","title":{"rendered":"Capital losses can help reduce NALI"},"content":{"rendered":"<p>Capital losses can be used to reduce or eliminate NALI tax exposures in relation to a tainted capital gain, says a legal expert.<\/p>\n<p><img loading=\"lazy\" alt=\"\" height=\"317\" src=\"https:\/\/acctweb.com.au\/images\/trusts.jpg\" width=\"475\" \/><\/p>\n<p>.<\/p>\n<div>William Fettes, senior associate at DBA Lawyers, noted in a recent webinar that the issue of non-arm\u2019s length gains being assessable only after specific reduction steps are applied had largely \u201cslipped under the radar\u201d in the recent legislative changes to non-arm\u2019s length income (NALI). However, a newly finalised tax determination offers crucial guidance on how NALI interacts with CGT provisions.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cTax Determination TD 2024\/5 was finalised on 17 July 2024 and outlines how the CGT provisions interact with NALI, and from my reading, it broadly favours the taxpayer,\u201d he said.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cAlthough s295-550 talks about ordinary income or statutory income being NALI, capital gains are generally only assessable as part of a net capital gain calculated under s102-5 of the ITAA 1997.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cTherefore, a question arises about whether it is only assessable net capital gain that is brought to tax as NALI after the reduction in relation to a tainted, non-arm\u2019s length capital gain.\u201d<\/div>\n<div>\u00a0<\/div>\n<div>Additionally, he noted, \u201cyou need to also consider what the market value substitution rules are in this context\u201d.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cIf you use the method statement for working out a net capital gain, does that mean a capital loss, and maybe combined with a general CGT discount, for example, reduce your tax liability? I think the answer is yes,\u201d he said.<\/div>\n<div>\u00a0<\/div>\n<div>Fettes said there are four key takeaways from the TD that can help clarify the issue. The first is that the assessable net capital gain has primacy for NALI purposes.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cTD 2024\/5 confirms the Commissioner\u2019s view that a NALI assessment in respect of a tainted capital gain is limited to the fund\u2019s assessable net capital gain,\u201d he said.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cThat is, despite s295-550(1) referring to \u2018an amount of ordinary or statutory income\u2019 that is NALI, paragraph [9] confirms the ATO view that in determining \u2018the amount\u2019 of statutory income that is NALI, the amount of NALI cannot exceed the superannuation fund\u2019s net capital gain as calculated under subsection 102-5(1) for the relevant income year.\u201d<\/div>\n<div>\u00a0<\/div>\n<div>He added that in circumstances where the non-arm\u2019s length capital gain made by the superannuation fund would otherwise exceed the superannuation fund\u2019s net capital gain, the amount of NALI equals the superannuation fund\u2019s net capital gain.<\/div>\n<div>\u00a0<\/div>\n<div>The second key takeaway is related to market value substitution rules and suggests that where a CGT asset is acquired below market value, as a result of non-arm\u2019s length dealings, the market value substitution rule in s112-20 of the ITAA 1997 will typically apply in relation to the asset\u2019s cost base.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cSimilarly, where a CGT asset is disposed for below market value capital proceeds such as a result of non-arm\u2019s length dealings, the market value substitution rule in s116-30 of the ITAA 1997 will typically apply in relation to the capital proceeds,\u201d Fettes said.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cHowever, the market value substitution rule in s116-30(2) does not apply where the capital proceeds from the CGT event exceed the market value and assuming that those capital proceeds were statutory income, the proceeds would be NALI.\u201d<\/div>\n<div>\u00a0<\/div>\n<div>The third key takeaway concerns how capital losses can reduce NALI and states that capital losses can reduce NALI arising from tainted capital gains.<\/div>\n<div>\u00a0<\/div>\n<div>In paragraph 15, the TD states that \u201cwhere a superannuation fund\u2019s net capital gain for the income year is nil due to the application of capital losses and previously unapplied net capital losses at steps one and two of the method statement in subsection 102-5(1), respectively, the superannuation fund will have no amount of NALI referable to the non-arm\u2019s length capital gain\u201d.<\/div>\n<div>\u00a0<\/div>\n<div>Finally, the TD considers the treatment of tainted and non-tainted gains and gives several examples showing SMSFs deriving capital gains that are both arm\u2019s length and tainted.<\/div>\n<div>\u00a0<\/div>\n<div>\u201cThe tax outcome is broadly a matter of working through the method statement in s102-5 of the ITAA 1997,\u201d Fettes said.<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>\u00a0<\/div>\n<div>Keeli Cambourne<br \/>\nAugust 26 2024<br \/>\nwww.smsfadviser.com<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Capital losses can be used to reduce or eliminate NALI tax exposures in relation to a tainted capital gain, says a legal expert.<\/p>\n","protected":false},"author":1,"featured_media":1941,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[4],"tags":[],"_links":{"self":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1940"}],"collection":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/comments?post=1940"}],"version-history":[{"count":1,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1940\/revisions"}],"predecessor-version":[{"id":1942,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1940\/revisions\/1942"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/media\/1941"}],"wp:attachment":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/media?parent=1940"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/categories?post=1940"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/tags?post=1940"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}